Saturday, September 29, 2012

MPs Back Hike in Pension Contributions?

The Conservative caucus has accepted a government proposal that would ease the burden on taxpayers by more than tripling how much members of Parliament and senators kick into their pension plans, CBC News has learned

Currently, MPs and senators contribute around $11,000 a year to their own pensions, while taxpayers add about $64,000 for each pension plan.Under the proposal, it would be a 50/50 split, CBC's national affairs editor Chris Hall reported.

A 50/50 contribution split would bring the parliamentary pension plan in line with changes being implemented for the federal public service.

If the pension plan's benefit levels do not change, politicians may need to contribute close to a quarter of an MP's current salary to meet taxpayers halfway. At current benefit levels, parliamentarians would have to contribute around $38,000 a year, a jump of more than $25,000 from what they pay now.

Alternatively, the benefits payable could become less generous.

Hall said it's still unclear whether eligibility rules could change, such as increasing how long MPs will have to serve from six years to eight, or if they will have to collect their pensions later at age 60, as opposed to 55.

A change in eligibility rules could also affect the amount serving parliamentarians need to contribute to the plan.

The pay freeze on MPs and senators salaries may end, but it's unclear how much salaries might rise to compensate for greater pension contribution requirements.

The changes are expected to take effect in the next Parliament, affecting MPs and senators who start in 2015 and beyond. Those already serving would not see their pension eligibility change.
Contribution disparities under current plan

A study by the C.D. Howe Institute last January found that in 2011, the taxpayers' share of contributions to the plan was more than six times the amount paid by MPs into the plan.

Numbers released last June by the Canadian Taxpayers' Federation tallied an even greater disparity in who bears the brunt of the costs: the taxpayer watchdog believes the public contributes more than $24 for every $1 contributed by MPs.

Under the current system, parliamentarians contribute seven per cent of their gross salaries to the pension plan. The pension pays out three per cent of this average of their best salary per year of service.

Many observers consider the current pension payouts very generous. Each MP makes just under $158,000 a year and after six years of sitting in the House, each qualifies at age 55 for a pension based on the average of his or her best five years of salary.

Assuming the minimum six years of service at the current $158,000 annual salary, a backbench MP stands to receive a pension of more than $28,000 a year.

Long-serving parliamentarians or those who earned higher salaries, such as cabinet ministers, receive much more.

Figures from 2011 suggest there are 59 former MPs and senators who receive more than $90,000 a year each. The average annual pension is $60,599 for former members of the Senate and $55,102 for former members of the House of Commons.

The parliamentary pension scheme changed significantly in the early nineties. Not every former MP, or senator or their survivors receives benefits at these levels. Sixty former parliamentarians, or spouses and dependents of former parliamentarians, received benefits of less than $15,000 in 2011.

The new rules for funding parliamentarians' pensions make sense. There has been a lot of pressure from groups representing Canadian taxpayers to change the current system where MPs have their snouts in the pension trough.

Another reason behind this move is that the Conservatives are preparing to introduce sweeping changes to federal public sector pensions. In the next few weeks, we will learn about new proposals that change eligibility rules, benefits and possibly an introduction of a defined-contribution plan for new employees entering the federal civil service (stay tuned).

Of course, as the pay freeze on MPs and senators salaries ends, they will likely vote in higher salaries to offset some of the higher pension contributions. Moreover, as the article mentions, it is unclear whether the eligibility rules change.

I'm not against giving MPs decent salaries and good pensions. I think if someone serves in public office, they are taking a big risk and we should reward them for doing so. It's also important to remember that not all MPs get pensions:

While few would dispute that the pensions provided for MPs are generous, one former MP cautions it would be a mistake to run for office simply for the pension.

A six-year minimum eligibility means MPs have to win at least two elections — possibly more in a minority government situation.

Former Liberal MP Glen Pearson says that those who have a career before going into politics have to decide whether to give up their highest-earning years to serve the public.

Of course, a winning candidate for federal office immediately earns a salary far beyond that of most Canadians for the years they're in Parliament — just under $158,000 a year (the average family income in Canada in 2010 was $76,600, according to Statistics Canada).

But if they don't make it beyond one election, they've lost out on their highest earning years in their previous career, Pearson points out.

Pearson won a byelection in London, Ont. on Nov. 27, 2006. He was defeated by Conservative MP Susan Truppe on May 2, 2011, giving him four and a half years in office.

Pearson, who is now too old to return to his previous career as a firefighter, often runs into former constituents who refer to what they assume is his huge pension.

Felt it was 'very much worth it'

"I think people don't realize that when somebody leaves another thing to go into politics, they're actually leaving a whole other livelihood behind, a pension scheme they might have been in, or money that they were making from another job. So you sometimes come back and you've actually taken a hit for being in politics," Pearson said.

"I did think about that, but because I was being asked to run for reasons that had to do with Africa and [the Canadian International Development Agency] and things that I really, really believed in, I felt I would take that chance. And I knew there was a chance that I would not get to the six-year stage. Absolutely, I knew that. But for that cause I felt that it was very much worth it, and for representing me and my constituents."

After they've hit six years in the House, MPs qualify at age 55 for a pension based on the average of their best five years of salary.

Assuming the minimum six years of service at the current $158,000 annual salary, a backbench MP stands to receive a pension of more than $28,000 a year.

The pensions are mostly funded by taxpayers. The Conservative government is planning to reform the pensions by having MPs contribute more.

Long-serving parliamentarians or those who earned higher salaries, such as cabinet ministers, receive much more.

Figures from 2011 suggest there are 59 former MPs and senators who receive more than $90,000 a year each. The average annual pension is $60,599 for former members of the Senate and $55,102 for former members of the House of Commons. Some MPs are elected young and are well positioned for a career after Parliament — with the added comfort of that pension.

Some will qualify before they are 30

Conservative MP Pierre Poilievre, for example, was first elected June 28, 2004, a few weeks after his 25th birthday. At 33 years old, he has already qualified for the MP pension. The same goes for House of Commons Speaker Andrew Scheer, who was elected the same day and at the same age. There are usually a handful of young MPs elected after each trip to the polls, but the May 2011 election saw a whole crop of New Democrat MPs in their early 20s take seats in the House. If re-elected, they would be set to hit their six-year eligibility and qualify for the pension before any of them hit their 30th birthday.

For those who go on to a career after politics, there are sometimes lucrative consulting jobs available (Pearson says they didn't interest him, so he's a volunteer director at the London foodbank).But it's not the case for everyone.

Pearson, who is recovering from major surgery to remove a benign tumour from his stomach, says he's happy to have time to spend with his wife and seven children. But the fact that three of them will be in university in the next six years caught him up on election night.

Years of volatile stock markets and low interest rates have made Canadians feel vulnerable about their retirement and they're looking to their pensions, a new report by Towers Watson suggests.

"Employees are willing to sacrifice cash pay, bonus opportunities and to a lesser extent paid time off to secure and increase their retirement benefits," the report said."The increased appeal for security is also affecting the factors that employees look for in a job."

Companies have been switching from defined benefit pension plans to defined contribution plans because of the risks inherent in promising to pay a regular monthly benefit years in the future.

However the report said defined benefit plans are attractive for companies that want to attract and keep employees.

The report said base pay and job security were top factors for taking a job among employees of all ages, but many are attracted to the security of their retirement.

"The appeal for security is particularly evident among employees with a defined benefit plan, which supports that these programs are an effective attraction and retention tool," the report said.

The survey by the pension consulting firm found a third of Canadian workers would give up part of their current compensation in return for improved security in retirement.

Towers Watson also said one in four would forgo a bonus in exchange for additional retirement benefits.

The report suggests that 50 per cent of those surveyed with a defined benefit pension plan identified their retirement program as a key reason for joining their current employer.

That compared with 30 per cent of those with a defined contribution plan or group RRSP.

And once employees have been hired, pension plans play an even larger role in why workers will stay with a company.

Depending on age, between 62 per cent and 71 per cent of Canadian workers in a defined benefit plan cite their retirement program as a compelling reason to remain with their current employer.

That compared with between 30 per cent and 50 per cent of those with a defined contribution plan.

Canadian workers look to their employers to help them prepare for retirement and identify personal savings, employer-sponsored retirement plan(s) and social security benefits as their top three expected sources of retirement income. While a majority of Canadian respondents are satisfied with their retirement plan, satisfaction tapers off among older workers.

A significant percentage of employees are not satisfied with employer-provided retirement information and tools. Although reactions vary, Canadians find face-to-face advice and web-based tools most effective and traditional mailings least effective.

As financial insecurity has become widespread, Canadian workers are increasingly interested in a secure rewards package with retirement benefits they can count on. Many respondents would trade off pay increases in exchange for guaranteed or more generous retirement benefits. Older Canadians — especially those with defined benefit (DB) plans — are most willing to surrender pay, bonus opportunities and, to a lesser extent, paid time off (PTO) for a larger and more secure retirement benefit. Canadians of all ages are also willing to relinquish control over investing their retirement assets in exchange for a guaranteed retirement benefit.

Canadian workers’ greater appetite for security is affecting their employment decisions. The survey shows a similar shift in the U.S. regarding the attraction and retention powers of retirement programs, particularly among DB plan participants. Canadian DB plan participants of all ages identify their retirement plan as an important reason for taking and remaining at their current job. Both younger and older employees ranked their DB plan as one of their top four reasons for taking their current job, along with job security, base pay and health care benefits.

This research shows strong evidence that DB plan sponsors have more stable workforces than organizations with only a defined contribution (DC) plan or group registered retirement savings plans (GRRSPs). DB plans are particularly effective at attracting security-minded workers who view their job as potential career employment. Employees expect their organization’s retirement plan to help them prepare for retirement.

Canadian MPs and companies should take note of this important survey as it clearly demonstrates that Canadians are feeling increasingly vulnerable about their pensions and given a choice, they prefer the security of a defined-benefit plan.

Below, CBC's Chris Hall reports on how the Conservative caucus has accepted a government proposal that will
dramatically increase the amount MPs and Senators contribute to their
pension plans.

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I am an independent senior economist and pension and investment analyst with years of experience working on the buy and sell-side. I have researched and invested in traditional and alternative asset classes at two of the largest public pension funds in Canada, the Caisse de dépôt et placement du Québec (Caisse) and the Public Sector Pension Investment Board (PSP Investments). I've also consulted the Treasury Board Secretariat of Canada on the governance of the Federal Public Service Pension Plan (2007) and been invited to speak at the Standing Committee on Finance (2009) and the Senate Standing Committee on Banking, Commerce and Trade (2010) to discuss Canada's pension system. You can follow my blog posts on your Bloomberg terminal and track me on Twitter (@PensionPulse) where I post many links to pension and investment articles as well as my market thoughts and other articles of interest.

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